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Information Heterogeneity and the Role of Foreign Exchange Interventions

Author

Listed:
  • Montoro, Carlos
  • Ortiz, Marco

    (Banco Central de Reserva del Perú)

Abstract

In this paper we introduce information heterogeneity in the FX market in line with Bacchetta and Wincoop (2006) in attempt to extend their results to a DSGE framework. We show that the introduction of information heterogeneity, in the shape of both dispersed information about fundamentals and non-fundamental based shocks, generates a magnification effect that can help obtaining a better approximation to the empirical moments. Also, FX intervention can improve the connection between the exchange rate and its fundamentals. Finally, in the methodological front, we extend the procedure proposed by Townsend (1983) to solve dynamic stochastic general equilibrium (DSGE) models with heterogeneous expectations.

Suggested Citation

  • Montoro, Carlos & Ortiz, Marco, 2020. "Information Heterogeneity and the Role of Foreign Exchange Interventions," Working Papers 2020-008, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2020-008
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    File URL: https://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2020/documento-de-trabajo-008-2020.pdf
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    Cited by:

    1. Ortiz, Marco & Miyahara, Ken, 2022. "Portfolio shocks and the financial accelerator in a small open economy," MPRA Paper 114224, University Library of Munich, Germany.

    More about this item

    Keywords

    Foreign exchange microestructure; Exchange rate dynamics; Exchange Rate Intervention; Monetary policy.;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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